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Self-enforcing Agreements and Forward Induction Reasoning

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  • Emiliano Catonini

Abstract

In dynamic games, players may observe a deviation from a pre-play, possibly incomplete, non-binding agreement before the game is over. The attempt to rationalize the deviation may lead players to revise their beliefs about the deviator’s behaviour in the continuation of the game. This instance of forward induction reasoning is based on interactive beliefs about not just rationality, but also the compliance with the agreement itself. I study the effects of such rationalization on the self-enforceability of the agreement. Accordingly, outcomes of the game are deemed implementable by some agreement or not. Conclusions depart substantially from what the traditional equilibrium refinements suggest. A non-subgame perfect equilibrium outcome may be induced by a self-enforcing agreement, while a subgame perfect equilibrium outcome may not. The incompleteness of the agreement can be crucial to implement an outcome.

Suggested Citation

  • Emiliano Catonini, 2021. "Self-enforcing Agreements and Forward Induction Reasoning," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 88(2), pages 610-642.
    • Handle: RePEc:oup:restud:v:88:y:2021:i:2:p:610-642.
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    File URL: http://hdl.handle.net/10.1093/restud/rdaa051
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    Cited by:

    1. Françoise Forges & József Sákovics, 2022. "Tenable threats when Nash equilibrium is the norm," International Journal of Game Theory, Springer;Game Theory Society, vol. 51(3), pages 589-605, November.
    2. Mariann Ollar & Antonio Penta, 2021. "A network solution to robust implementation: The case of identical but unknown distributions," Economics Working Papers 1776, Department of Economics and Business, Universitat Pompeu Fabra.
    3. Pierpaolo Battigalli & Emiliano Catonini, 2022. "The Epistemic Spirit of Divinity," Working Papers 681, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.

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